Shares Falling, Citigroup Talks to Government

Near the end of trading at the New York Stock Exchange on Friday, traders worked beneath a Citigroup logo.Credit
Chang W. Lee/The New York Times

With the sharp stock-market decline for Citigroup rapidly becoming a full-blown crisis of confidence, the company’s executives on Friday entered into talks with federal officials about how to stabilize the struggling financial giant.

In a series of tense meetings and telephone calls, the executives and officials weighed several options, including whether to replace Citigroup’s chief executive, Vikram S. Pandit, or sell all or part of the company.

Other options discussed included a public endorsement from the government or a new financial lifeline, people involved in the talks said.

The course of action, however, remained uncertain on Friday night, these people said, and other options may yet emerge. But after a year of gaping losses and an accelerating decline in share price, Citigroup, which has $2 trillion in assets and operations in scores of countries, is running out of time, analysts said.

After a board meeting early Friday morning, Citigroup’s management and some board members held several calls with Henry M. Paulson Jr., the Treasury secretary, and with the president of the Federal Reserve Bank of New York, Timothy F. Geithner, who later emerged as President-elect Barack Obama’s choice to be Treasury secretary.

As Citigroup’s stock sank during the day, falling 68 cents to close at $3.87, the Federal Reserve was carefully monitoring how much money corporations and other customers were withdrawing from the bank, people involved in the discussions said.

The Fed was trying to ascertain whether the tumult in the stock market could escalate into something worse.

So far, these people said, most customers and clients remained committed to Citigroup.

But with Citigroup’s troubles opening a new chapter in the long-running financial crisis, government officials said that the Treasury Department was considering whether to ask for the second half of the $700 billion rescue fund approved by Congress in September.

It was unclear whether any of that money would be used to make a cash infusion into Citigroup, which received $25 billion from the government in October. A second financial rescue for banks might be difficult politically at a time that the struggling auto industry is being turned away in Washington.

As Citigroup’s fortunes diminished on Friday, Mr. Pandit, the company’s embattled chief executive, went on the offensive. He worked the phones and held a companywide call to shore up the confidence of anxious employees.

Later in the day, the company held a similar call with large corporate customers. On Sunday, Citigroup plans to run full-page advertisements in major newspapers that acknowledge “our financial markets have been tested in unprecedented ways,” but argue that the company has a broad range of businesses and enough management expertise to pull through. In a nod to the company’s slogan, the text concludes: “That’s why now, more than ever, you can feel confident that Citi never sleeps.”

Still, Citigroup’s executives are not expected to sleep much this weekend as they continue to pursue contingency plans, including what they might need to calm anxious investors before the stock market opens on Monday morning.

One maneuver that Mr. Pandit has championed is for the Securities and Exchange Commission to reinstate the “uptick rule,” which prevents short-sellers from betting against companies whose stock price is falling. Mr. Pandit has been lobbying the S.E.C. for the past week, as have other Wall Street chiefs.

Photo

Vikram S. Pandit, center, the chief executive of Citigroup, set up a companywide phone call to reassure anxious employees.Credit
Brendan Smialowski for The New York Times

Mr. Pandit and others have suggested that Citigroup is a victim of short-sellers, which some have blamed for speeding the demise of other financial companies this year.

In September, Richard X. Bove, an analyst at Ladenburg Thalmann, predicted that short-sellers would turn their attention to larger and larger financial companies, including Citigroup, which he said at the time was strong enough to withstand the pressure.

“They’re going to hit a company that is too well grounded, too well capitalized, and I think that will be Citigroup,” he said. Still, while Citigroup is widely regarded as too big and too interconnected to be allowed to fail, its immediate future is uncertain. Executives at other financial firms said that there are not many options left, and that Citigroup’s stock has reached a level that may force government action.

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“The reason you have to ‘save’ Citibank is you cannot allow this hysteria,” said Peter J. Solomon, chairman of the Peter J. Solomon Company, a small investment bank.

Investors and executives at other banks said that one way the bank might be able to give itself some breathing room would be for Mr. Pandit, who became chief executive less than a year ago, to step down.

Executives in New York have also begun pointing out that Citigroup has a huge global presence. They suggested that perhaps a government bailout should involve money from other countries in addition to the United States.

“If there’s a flight from Citi’s stock, that’s unfortunate, but I don’t think that’s the government’s business,” said David M. Walker, the president of the Peter G. Peterson Foundation and a former United States comptroller general.

Mr. Walker said that the government should be concerned about Citigroup only if there were a run on the bank that threatened the financial system. The government should not, he said, be concerned about shareholders.

Some executives, however, argued that it was important to protect Citigroup’s shareholders because if they lose their investment, that will send other bank stocks diving.

Among the other ideas being bandied about Washington and the halls of Citigroup would be an assisted merger between Citigroup and another major bank. The merger might be structured with government assistance based on the blueprint that was developed for the Wachovia and Citigroup merger.

That deal ultimately did not go through because Wells Fargo stepped in with a higher offer, but it would have involved the Federal Deposit Insurance Corporation sharing the losses on $312 billion of Wachovia’s loans with Citigroup. Citigroup would have absorbed the first $42 billion in losses, and the government would have absorbed the rest. The F.D.I.C. would have been given $12 billion in warrants and preferred shares of Citigroup in exchange.

That structure could be used in a merger, but this time around, the government would be absorbing losses on Citigroup’s loans. But it remains unclear what other bank is in a strong enough position to merge with Citigroup.

Inside Citigroup on Friday, some angry senior executives said that the government had “allowed” Wells Fargo to take Wachovia from them, people at the firm said. They argued that had Citigroup and Wachovia been allowed to merge “we wouldn’t be in this position,” one executive said.

Another option might be for the government to purchase a large chunk of Citigroup’s assets in one swoop. Such an action could be structured similarly to the proposed deal in Switzerland for UBS. A spokesman for UBS, Mark Arena, said on Friday that the arrangement would allow UBS to have “one of the cleanest balance sheets of our peers.”

At the time of the deal’s announcement in October, Jean-Pierre Roth, president of the Swiss National Bank, said the government had the time to wait for the values of the assets to improve. “UBS does not have time,” Mr. Roth said.

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